Long-term bond yields have risen across the US, Europe and Japan as major advanced economies run high debt-to-GDP levels, signalling lower market tolerance for fiscal imprudence and rising inflation risks. India has a relatively lower level of debt, yet it is important for India to keep trimming its debt.
Indeed, during a recent address in Chicago, finance minister Nirmala Sitharaman reaffirmed the government’s commitment to reduce the Centre’s debt to 50% of GDP by 2030. This is in keeping with the fiscal glide path prescribed for the five years from 2026-27 to 2030-31.
If we assume that states’ debt will remain at the current level of about 30% of GDP, total government debt should be at 80% of GDP by 2030. That is low compared with the 100% plus of major advanced economies. In addition, most of the borrowing is domestic, so there is no exchange rate risk.
Despite these advantages, India cannot afford to be complacent about its debt. It needs to stay the course on fiscal consolidation for two reasons: debt levels are high compared with other emerging-market peers, and interest payments as a percentage of GDP and government revenue are quite sizeable.
Lower tolerance for EMs
When India is benchmarked against a group of comparable emerging markets, it is among the countries with the highest debt-to-GDP ratio. This is a matter of concern because global investors have a lower debt tolerance for emerging markets than for advanced countries.
For example, nobody expects Japan, with debt estimated at 204% of GDP, to default. On the other hand, the ratings outlook for Indonesia, with debt to GDP at 41%, and Mexico, with debt to GDP at 62%, was revised downward from stable to negative this year, largely due to widening fiscal deficits and higher government spending.
Advanced economies get away with higher borrowings, owing to their deep and liquid government bond markets, independent and credible institutions, and greater availability of revenues for . Emerging economies have large funding needs and inadequate domestic savings. Therefore, India’s medium-term strategy of bringing down debt is critical to retain investor confidence and attract foreign capital flows.
Interest burden
India largely underperforms on two widely-tracked indicators of fiscal health: interest payments as a percentage of GDP and interest payments as a percentage of government revenue.
The former measures the size of debt obligations, and the latter assesses the ability of the borrowing country to service its debt obligations. India’s interest-to-GDP ratio is around 5%, considerably higher than the median level of 2.1% among large emerging market economies. To some extent, this is logical, because India also has relatively high debt. But the relationship between debt and interest is not straightforward.
For instance, China’s average debt over 2022-24 was 84% of GDP, and its interest payments amounted to 0.93% of GDP. In contrast, India’s average debt in the same period was quite similar—at 84.8% of GDP, but interest payments amounted to 5.1% of GDP. In another example, both India and South Africa had interest-to-GDP ratios around 5%, but South Africa had much lower debt at 23.4% of GDP.
Interest differential
The reason for this apparent disconnect between debt and interest is that the interest-to-GDP ratio is determined by three variables: interest rate, outstanding debt, and GDP. Countries with high debt and high interest rates face higher interest payments, and those with low debt and face comparatively lower interest payment burdens.
India belongs to the first category. In the past decade, the weighted average rate on central government securities has ranged from 6 to 8%, and the corresponding rate for state government securities was 20 to 80 basis points higher. Rates hover around 7-8% when the RBI is tightening policy (2022, 2023) and they drop to 6-7% in periods of monetary easing (2025).
China’s economic arc is quite different: benchmark government yields have not crossed 4% in the last decade. Since the pandemic, it has faced deflationary conditions, a property market downturn, and weak domestic demand. The Chinese central bank has kept rates low to stimulate spending, which is reflected in declining yields of government bonds. Thus, China’s high debt is offset by its ultra-low interest rates, resulting in a low interest-to-GDP ratio.
Revenue strain
The ratio of interest-to-government revenue measures the share of revenue committed to interest; the higher the ratio, the lower the revenue available for other expenditure.
A study of emerging market and developing countries by the International Monetary Fund showed that ratios above 16-19 % signal a likelihood of fiscal stress. India is well over this threshold: a quarter of its revenue is earmarked for interest payments.
The challenge is that the government’s ability to increase tax revenue is constrained by a narrow tax base and large informal sector. In fact, the centre’s tax revenue has been stuck at 10-11% of GDP for more than two decades. Combine low revenue with a high interest burden, and it is easy to see why India faces a higher burden compared to its .
There are no simple solutions. High nominal growth could lower debt ratios by increasing the denominator. In addition, stronger growth would increase household and corporate income, potentially leading to higher tax revenues. But given the economic shocks of the past few years, relying on growth is not enough.
The recent run-up in global bond yields indicates that markets are less tolerant of public debt, especially as trade tensions and high oil prices add to inflationary pressures. With borrowing costs unlikely to decline significantly in the near term, India must stay the course on reducing public debt, at both central and state levels, to contain its interest burden and retain investor confidence.
The author is an independent writer in economics and finance.